Executive Briefings

Largest U.S. Companies Said Taking on More Debt Rather Than Improve Working Capital Performance

The largest public companies in the U.S. chose to go even further into debt in 2015 instead of driving cash out of their businesses by improving how they collect from customers, pay suppliers and manage inventory, according to the annual working capital survey from REL, a division of The Hackett Group Inc. Overall working capital performance continued to degrade, reaching poorest performance levels since the 2008 financial crisis.

Largest U.S. Companies Said Taking on More Debt Rather Than Improve Working Capital Performance

A significant factor in this year’s overall results was low oil prices, which caused oil and gas companies to increase reserves, dramatically worsening both their inventory and overall working capital performance, and dragging down the performance of the entire survey group.

The survey looks at the performance of 1,000 of the largest public companies in the U.S. during 2015. It saw corporate debt rise significantly for the seventh consecutive year, as a result of low interest rates. Debt was up 9.3 percent this year, or $413bn. Since 2009 the total debt position of the companies in the survey has increased by over 58 percent.

Working capital performance – which includes collections, payables and inventory -- worsened somewhat, with a deterioration of 2.4 days or 7 percent in cash conversion cycle (CCC), or the ability of companies to turn spending on overhead, raw materials and labor into cash. It is now at 35.6 days, the worst since before the 2008 financial crisis. CCC is a key measure of working capital performance which factors in how efficient companies are at managing inventory, receivables, and payables.

The working capital improvement opportunity of companies in the survey is now over $1tr, or 6 percent of the U.S. GDP. By component the improvement opportunity is: $421bn in inventory, $316bn in receivables and $ 334bn in payables.  This opportunity represents the amount of working capital improvement that could be achieved if all companies reached the working capital performance of top quartile performers in their individual industry.

Top performers in the REL 1000 (companies in the upper quartile in their industry) are now seven times faster at converting working capital into cash than the typical companies. These companies collect from customers more than two weeks faster, pay suppliers more than two weeks slower, and hold less than half the inventory.
In the entire survey group, inventory performance worsened significantly, and was the largest factor in the overall working capital deterioration. Days Inventory Outstanding increased by over 10 percent, and rose to over 49 days.  Days Sales Outstanding (collections) worsened by only 1.1 percent, and Days Payables Outstanding (payables) improved by over 5 percent.

Few companies have been able to sustain working capital improvements, the survey found. Only 2 percent of the companies in the study improved CCC for five years running. Only four improved CCC every year during the past seven years (Goodyear, Priceline, Kimberly-Clark, and AmerisourceBergen).

REL, a division of The Hackett Group, is a consulting firm dedicated to delivering sustainable cash flow improvement from working capital and across business operations. 

Source: REL

A significant factor in this year’s overall results was low oil prices, which caused oil and gas companies to increase reserves, dramatically worsening both their inventory and overall working capital performance, and dragging down the performance of the entire survey group.

The survey looks at the performance of 1,000 of the largest public companies in the U.S. during 2015. It saw corporate debt rise significantly for the seventh consecutive year, as a result of low interest rates. Debt was up 9.3 percent this year, or $413bn. Since 2009 the total debt position of the companies in the survey has increased by over 58 percent.

Working capital performance – which includes collections, payables and inventory -- worsened somewhat, with a deterioration of 2.4 days or 7 percent in cash conversion cycle (CCC), or the ability of companies to turn spending on overhead, raw materials and labor into cash. It is now at 35.6 days, the worst since before the 2008 financial crisis. CCC is a key measure of working capital performance which factors in how efficient companies are at managing inventory, receivables, and payables.

The working capital improvement opportunity of companies in the survey is now over $1tr, or 6 percent of the U.S. GDP. By component the improvement opportunity is: $421bn in inventory, $316bn in receivables and $ 334bn in payables.  This opportunity represents the amount of working capital improvement that could be achieved if all companies reached the working capital performance of top quartile performers in their individual industry.

Top performers in the REL 1000 (companies in the upper quartile in their industry) are now seven times faster at converting working capital into cash than the typical companies. These companies collect from customers more than two weeks faster, pay suppliers more than two weeks slower, and hold less than half the inventory.
In the entire survey group, inventory performance worsened significantly, and was the largest factor in the overall working capital deterioration. Days Inventory Outstanding increased by over 10 percent, and rose to over 49 days.  Days Sales Outstanding (collections) worsened by only 1.1 percent, and Days Payables Outstanding (payables) improved by over 5 percent.

Few companies have been able to sustain working capital improvements, the survey found. Only 2 percent of the companies in the study improved CCC for five years running. Only four improved CCC every year during the past seven years (Goodyear, Priceline, Kimberly-Clark, and AmerisourceBergen).

REL, a division of The Hackett Group, is a consulting firm dedicated to delivering sustainable cash flow improvement from working capital and across business operations. 

Source: REL

Largest U.S. Companies Said Taking on More Debt Rather Than Improve Working Capital Performance